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HEALTH CARE SPENDING: HCFA Analysts Expect 10-Year Rise

Health care spending will rise from 13.6% of gross domestic product to 16.6% of GDP by 2007, according to projections made by analysts at the Health Care Financing Administration. The cost projections, published in the newly released issue of Health Affairs, further estimate that total national health spending "will likely reach $2.1 trillion by 2007." The authors note that one of the biggest factors driving higher health spending is "[r]ecent stronger growth in real per capita income." They also write, "In a reversal of recent trends, the higher anticipated growth in real per capita national health spending will be driven almost entirely by rising expenditures in the private rather than the public sector."

Managed Care Watch The authors write that the "pronounced slowdown in health spending since 1992 is often attributed to the effects of managed care." In looking ahead at spending through 2007, the authors "assum[e] a primarily one-time effect for managed care, with full effects realized with some lag." However, they do take into account "a small reduction in the long-term trend rate of growth resulting from the effects of the interaction between managed care and technological change." In the public sector, managed care is not expected to check growth in Medicare spending. According to the authors, "Medicare's payment mechanism will continue to be based largely on average per beneficiary costs in fee-for-service Medicare. As a result, managed care plans are expected to continue to compete for enrollees through the broadening of benefits rather than through price competition." In their conclusion, the authors contend that the question of whether managed care can continue to hold down costs remains a "critical question."

Hospitals: Hospital spending growth "will remain well below growth in aggregate national spending" through 2007, driven largely by federal Medicare changes that de-emphasize inpatient care. Overall, "the hospital spending share is expected to fall from 34.6% to 32% in 2001."

Physicians: "Spending for physician services is expected to pick up speed over the next four years, with annual increases climbing from a low of 2.9% for 1996 to 7.3% by 2000," the authors write. The study estimates that Medicare spending for physician services will "grow at an annual rate of 8.9% for 1997-1999," with that growth slowing slightly after 2000 "as risk adjusters are introduced into payment formulas for managed care." From 1997-1999, private-sector spending on physician services is estimated to grow 4.7% annually.

Pharmaceuticals: Spending on drugs "is expected to accelerate moderately through 1998 and to sustain fairly rapid rates of growth through 2007." The authors project that "[r]eal per capita growth is expected to average just below 6%, about equal to the average during the 1980s," but they note that drug price inflation is "assumed to remain below the exceptionally rapid pace of the 1980s."

Nursing Homes: Spending growth for nursing home care "is expected to accelerate briefly in 1997 and then decelerate for 1998-2000, growing 5.1% on average." The authors attributed the slowdown to "slower growth in Medicaid expenditures and a sharp cutback in the rate of growth for Medicare spending after the introduction of prospective payment."

Home Health: The authors note that home health spending growth has declined in the past year as a result of changes made in how Medicare pays for the services. However, "home health spending is expected to continue to outpace growth in total national health spending over the projection interval."

Other Providers: The authors estimate big spending increases for care provided by "specialty clinics and independent practitioners such as podiatrists, optometrists, and chiropractors." They project that annual spending growth for these services will "increase from 6.8% ... in 1996 to a peak of 8.3% by 2001."

Coverage: Over the long term, the authors expect the number of uninsured Americans to increase "as growth in health benefit costs continues to exceed growth in compensation and as employees contribute more for their health coverage."

'Calm Before The Storm?' Lower-than-average population growth in the short term, coupled with a slowdown in the overall aging of the U.S. population, will act to slow national spending growth, the authors write. However, they contend that "the coming decade represents the calm before the storm, to be followed by a period of acceleration in aging baby boomers' demand for health services." The authors cite two key factors to watch over the next decade. First, the "most important moderating influence for growth in health care costs is expected to be the slowdown projected for Medicare and (to a lesser extent) Medicaid." Second, the authors note "the recent higher growth in real per capita income, which, when combined with the anticipated slowdown in private-sector managed care enrollment increases, will boost growth in real per capita private health spending," a development that "will more than offset the slower growth expected for the public sector." The authors write that their projections are not certain: "In light of the wide variation in historical experience, and the recent and ongoing structural change in health care markets, these estimates must be regarded as merely an indication of probable trends." Sheila Smith of HCFA's National Health Statistics Group is the lead study author (September/October 1998 issue). Note: Health Affairs is published by Project HOPE. The journal's editorial offices can be reached at 301/656-7401.

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